Gold breaks out, U.S. dollar breaks down

Focus: Gold, U.S. dollar, ABX, KGC, GG, ERJ, PCLN, BA, GES

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CINCINNATI (MarketWatch) -- For the time being, the U.S. markets continue to absorb technical challenges.

And while the near-term backdrop favors further consolidation -- at least sideways chopping around, if not a retest of the August low -- the longer-term uptrend is intact.

The hourly chart on the Standard & Poor's 500 index details the past three weeks.

After breaking down last week--- driven by 15-to-1 negative market breadth -- the S&P has reversed to the breakdown point on lighter volume.

And while its longer-term uptrend is intact, further near-term consolidation would typically be needed to work off last week's breakdown.

From current levels, initial support holds at 1,016, followed by another floor around the 1,010 mark.

Meanwhile, the Dow industrials' near-term view is similar.

Like the S&P, the Dow sold off sharply last week, before establishing support around 9,250.

It subsequently reversed to the breakdown point, keeping its near-term outlook in flux.

And the Nasdaq's near-term backdrop is the most volatile.

After bottoming last week at 1,958, it's reversed to the breakdown point, matching the upper end of its three-week range.

Widening the view to six months highlights the real technical issues taking shape.

Notice that the Nasdaq, along with all major U.S. benchmarks, is gravitating to the early-August peak.

It staged a false break higher last month and then tried to sell off, but the net result is a stalemate near the highs.

Moving to the Dow, its technical backdrop is similar.

Most importantly, the blue-chip benchmarks remains within a longer-term uptrend, but the early-August peak marks the near-term battleground for the bulls and bears.

Along with the other benchmarks, the S&P 500 has whipsawed around the early-August peak.

Its recent price action resembles the June consolidation phase, the month before the second-quarter earnings reports hit.

The current consolidation phase is arguably similar, taking shape just a month before financial results for the third quarter.

The bigger picture

As traders return from the holiday, the U.S. markets' backdrop can be broken down with three charts.

Starting with the S&P's hourly chart, it broke down last week with conviction.

The initial violation of the 1,016 area was driven by 15-to-1 negative breadth, and the index has since staged a reflexive lift to the breakdown point.

Widening the view to six months, the chart for the SPDR Trust S&P 500
SPY, +0.30%
furthers the "corrective-bounce" argument.

Notice last week's breakdown came on the SPY's strongest volume since April, while its subsequent lift has come on unusually light volume.

While all trends technically point higher -- the S&P holds atop its 20-day, 50-day and 200-day moving averages -- a sideways consolidation phase is likely underway.

The S&P 500's six-month view rounds out the backdrop.

Setting aside last week's volatility -- the whipsaws around the early-August peak -- this wider view points to a longer-term uptrend.

The S&P is positioned atop both its 50-day and 200-day moving averages, and both trending indicators are upward sloping.

Summing up the backdrop

Technically speaking, the U.S. markets remain within a longer-term uptrend.

Yet within this framework, the S&P has suffered two 15-to-1 downdrafts in less than three weeks, cementing S&P 1,039-to-1,044 as significant resistance.

Looking ahead, further near-term consolidation is likely in order - reduce risk, and avoid lower-quality names - but until proven otherwise, the broader uptrend is intact.

Tuesday's watch list

The charts below highlight names well positioned technically. These are intended as radar-screen names -- sectors or stocks positioned to move in the near term. For the original comments on the stocks below, check out The Technical Indicator Library.

ETF

Symbol

Fri Close

Support

Resistance

SPDR Gold Shares

GLD

$97.53

$96.20

New High

Drilling down to sectors, gold's breakout is the most obvious technical event taking shape.

As the chart illustrates, the SPDR Gold Shares
GLD, -0.70%
spiked late last week, clearing resistance at the August and June peaks.

The rally came on strong volume -- meaning this is a valid breakout -- and while near-term extended, its backdrop favors eventual follow-through to record highs.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.